Risk and return both high in crop farming

Steve Leer, Purdue University

Fri, 2011-02-18 16:37

Crop farming is risky business, what with rising production costs, volatile commodities markets and unpredictable weather. While the stakes are high, the returns at present also are high, says a Purdue University agricultural economist.

"Right now the rewards are pretty good in agriculture. We're in one of those unique situations where, while we've got a lot of volatility in the market we actually can be rewarded for taking a risk in agriculture, compared to some times in the past when we had a lot of volatility but didn't have much opportunity to capture the upside."

Crop farming is risky business, what with rising production costs, volatile commodities markets and unpredictable weather. While the stakes are high, the returns at present also are high, says a Purdue University agricultural economist.

Soaring grain prices afford farmers the unusual opportunity to spend more to ensure a good crop and still pocket a handsome profit, said Mike Boehlje.

"Right now the rewards are pretty good in agriculture," Boehlje said. "We're in one of those unique situations where, while we've got a lot of volatility in the market we actually can be rewarded for taking a risk in agriculture, compared to some times in the past when we had a lot of volatility but didn't have much opportunity to capture the upside."

Boehlje and Purdue agricultural economist Brent Gloy outline eight management strategies producers can employ to earn as much from their crop as possible in the paper "Managing the Risk -- Capturing the Opportunity in Crop Farming."

Boehlje, Gloy and ag economist Bruce Erickson will discuss crop farming's risks and rewards during a free webinar at 1 p.m. Feb. 25. The event is sponsored by the Purdue Center for Commercial Agriculture. To register, visit the center's website at http://www.agecon.purdue.edu/commercialag/ then click on the event link and then "Register Now."

The event Web page contains a link to Boehlje's and Gloy's paper and a short video preview of the webinar. Those registering are encouraged to review both before the Feb. 25 event.

Webinar viewers will be able to ask questions, and the presentation will be archived for later viewing.

Among the eight strategies the economists recommend producers implement are securing crop margins, purchasing crop insurance, locking in interest rates on long-term debt, paying down debt, establishing a cash reserve, avoiding overbuying and overbidding, proceeding slowly with growing the business and eliminating waste within the farm operation.

"Many crop farmers have the opportunity to lock more than $200 an acre pure profit for the 2011 crop," Boehlje said. "That's something that we typically don't see. Our research shows that this is probably one of the best times in the last 20 years to have margins at that level that we can actually book beforehand.

"One of the first things we suggest producers do is sell some of the corn and soybean crop that they're planning to plant this spring. They certainly should continue to sell the 2010 crop but also start to do some pricing of the 2011 crop as well."

"We're moving into a period of time when interest rates have the potential to move up," Boehlje said. "There's increasing evidence that as we look to 2013 and 2014 we're going to see higher interest rates.

"Producers have an opportunity right now to lock in interest rates on a five-year term on our term debt. We're not saying change the length of the payout but to fix interest rates, say, for the next five years. You can probably do that for about a 1.5 percent premium above where rates are today on variable rate loans. That's more costly, but it's an insurance premium we ought to pay to lock those rates in."

Boehlje encouraged farmers to make the proper investment in their crops.

"This is not the time to scrimp on production costs," he said. "Make sure you get the best yields possible."